A Rising Tide of Impact Investing

By Sonia Talati

There has been a lot of talk in the past few years about ­impact investing, which attempts to generate market-rate ­returns while advancing social or environmental goals (see Barron’s Penta cover story, Nov. 30). But how big of an impact is impact investing actually having? We asked Fidelity ­Investments to ­include several questions about the strategy in a survey it ­conducted with high-net-worth clients in December.

The major takeaway: Impact investing is a surprisingly big deal. Some 40% of the Fidelity respondents said they have as much as 20% of their assets allocated to impact investments, from a ­microfinance fund in Central America building ­affordable housing to micro­loans financing a start-up in ­India. Another 10% reported having more than 20% in the strategy.

“I was encouraged by that ­response, because if you would have asked that question 10 years ago,” you would have seen a much lower response, says Chris Sheldon, chief investment officer of Fidelity Private Wealth Management. “There’s greater awareness that these types of­ ­capabilities are out there.”

Photo: Courtesy of Fidelity

Fidelity executives Chris Sheldon, Kevin Ruth, and Chris McDermott discuss the poll results and their latest thinking about the markets.

For all of impact investing’s growing importance, says Fidelity, that still leaves about half of the surveyed clients saying they have no exposure to the strategy.

John Wilson, the head of ­research at Cornerstone Capital Group, an investment-advisory firm with a focus on sustainability, is bullish on impact ­investing, particularly as a massive wealth transfer unfolds. The older generation is getting into impact investing more quickly while the younger generation is pushing for it, he says. Boston College’s Center on Wealth and Philanthropy estimates that some $59 trillion will be transferred generationally in the U.S. between 2007 and 2061, with $6.3 trillion going to charitable bequests.

As younger age groups gain control over those assets, impact investing will grow in importance, predicts Wilson. Since launching in 2013, Cornerstone has gathered $800 million in ­impact assets ­under management.

Impact investing is a step in the right direction, says Sheldon, and one that has been consistently growing.

If current trends are any indication, much of that wealth will be invested overseas. Nearly a quarter of respondents said they plan to invest most heavily in international stocks this year—a remarkable figure given current emerging market woes—while 59% focus on domestic stocks and 10% opt for ­domestic fixed-income investments. The interest abroad is “an ­encouraging boost, because it shows we have less of a home-country bias, where people invest in what they’re comfortable with,” says Sheldon. Fidelity ­reports that China and Europe have gained traction from U.S. investors. Despite the current volatility, Sheldon expects opportunities in broader emerging markets over the next 10 years.

Respondents felt less upbeat about the Middle East, with 10% saying they consider instability in the region “to be the ­single most significant investment risk over the next year.” That still trails behind fears of terrorism (21%) and U.S. political ­instability (23%). That result ­surprised Sheldon, who expected instability in the Middle East to be of greater concern than ­terrorism.

An overwhelming majority of Fidelity respondents felt that the U.S. economy was heading in the right direction. “People are well connected to the message” that the economy is on the ­upswing, Sheldon says, but they remain cautious, with the memory of the 2008 financial crisis still fresh.

While 74% felt moderately positive, 15% thought the economy was not moving at all, and only 5% believed it was heading in the wrong direction. We aren’t suffering from excessive enthusiasm—that’s for sure—and people seem to have realistic perspectives, says ­Sheldon.

In an environment of rising interest rates, respondents aren’t about to wander too far afield. High-net-worth clients continue to generally favor stocks, followed by fixed-income investments—for ­stability in their portfolios—trailed by alternative investments, real ­estate, and other strategies.

About Penta

Written with Barron’s wit and often contrarian perspective, Penta provides the affluent with advice on how to navigate the world of wealth management, how to make savvy acquisitions ranging from vintage watches to second homes, and how to smartly manage family dynamics.

Richard C. Morais, Penta’s editor, was Forbes magazine’s longest serving foreign correspondent, has won multiple Business Journalist Of The Year Awards, and is the author of two novels: The Hundred-Foot Journey and Buddhaland, Brooklyn. Sonia Talati is Penta’s reporter about town, both online and for the magazine. She previously worked for the Wall Street Journal and various television station affiliates around the country. Sonia has a B.A. in economics from the University of California, Los Angeles, and an M.A. from Columbia University Graduate School of Journalism.